VTMSX or VIOV for Small Cap?

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stocknoob4111
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Joined: Sun Jan 07, 2018 12:52 pm

VTMSX or VIOV for Small Cap?

Post by stocknoob4111 » Wed Dec 05, 2018 6:17 pm

I currently have 100% of the US domestic equity allocation to VFIAX and VOO (i.e. VG S&P500 Index). I wanted to diversify into Small Caps and was originally considering VSMAX. It was recommended in another thread that VTMSX was a better alternative instead and it seemed like it, the fund has very high ratings everywhere. Yesterday I bought a bunch of VTMSX.

However, the more I read up on this I realize that VIOV (Small Cap Value) may be better to hold long term due to superior returns. I backtested Small Cap blend vs Value and it was true that Small Cap Value had higher returns in most periods I looked at. Also since 1972 it was a significant margin (Small Cap total had a CAGR 11.x% and Value had 14.x%).

So questions - did I make a mistake by buying VTMSX? If so, should I sell it and buy VIOV instead? My time horizon is around 20 years. One thing I notice about VIOV is that the expense ratio is rather high at 0.20%.

MindTheGAAP
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Re: VTMSX or VIOV for Small Cap?

Post by MindTheGAAP » Wed Dec 05, 2018 6:21 pm

Do you want to have a small-value tilt to your portfolio? Or do you feel more comfortable tilting only to size (Small) and not also to a factor (value)? Are you willing to hang on even if VIOV under-performs VTMSX?
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

stan1
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Re: VTMSX or VIOV for Small Cap?

Post by stan1 » Wed Dec 05, 2018 6:26 pm

As an independent investor you really have to read the theory, understand it, and buy into the reasons why there might be a factor premium (size, value, quality, momentum). Backtesting is not enough because there could be long periods of time where any factor based strategy deviates from a market cap weighted strategy. If you don't buy into the rationale for factor investing I would not do it. It is too easy to have regrets and switch back to mark cap weighting at the wrong time. Lots of threads with discussion about this, and the recent threads on whether to invest in international equities all carry the same themes. Sometimes past performance doesn't match the theory and there's no way to know whether future performance will do any better.

stocknoob4111
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Joined: Sun Jan 07, 2018 12:52 pm

Re: VTMSX or VIOV for Small Cap?

Post by stocknoob4111 » Wed Dec 05, 2018 6:33 pm

I guess my motivation to diversify into Small Caps is to capture higher returns vs Large Caps. I understand this will make my portfolio more volatile and i'm ok with taking the additional risk. That said I would like to make the best choice given my 20 year time frame.

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Alexa9
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Re: VTMSX or VIOV for Small Cap?

Post by Alexa9 » Wed Dec 05, 2018 6:53 pm

Small Value is one of the most frequently discussed premiums on here. Many arguments for and against it for you to decide yourself.
You might Google Fama-French and Larry Swedroe.
VSIAX is another one to consider. I would relax and do some reading for a while before you decide.

samsdad
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Joined: Sat Jan 02, 2016 6:20 pm

Re: VTMSX or VIOV for Small Cap?

Post by samsdad » Wed Dec 05, 2018 8:08 pm

I went with small blend via VTMSX, VIOO, and IJR because my understanding from reading the Cliff Asness paper “Size Matters if You Control Your Junk” or whatever catchy if adolescent title it has showed that it was the quality factor of the equities which accounted for smallcap premium rather than value per se.

I’m just going from recollection while typing on my phone waiting for dinner. So, perhaps read the paper and come back and tell me whether I’m on track.

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